What are your thoughts on “trend”? We’ve all heard it over and over…trend is your friend. Don’t fight the trend. etc. And there are so many ways to identify trend on a chart (moving average crosses, lower highs and lows/higher highs and higher lows, etc.)….what exactly identifies/defines “trend” to you? And what are your thoughts on trading both with trend…and also trading countertrend?
Trading with the trend can be powerful, as long as by the time you identify it and find a trade, the move is not over. If you get the trend right, it can lead to higher win rate trades and higher reward risk ratio trades. I believe Paul Tudor Jones has a note on his desk saying:
Find a Trending Market
Obviously, there are different ways to identify a trend:
1. You can use some technical analysis principles to identify this. Things such as higher highs, and higher lows for an uptrending market. Other people use key moving average crossover signals. Other people use just price breaking out of nearby resistance/support. Every form of technical analyst has their own methods.
2. Then there are just general volatility principles I teach in the mastery course – the ODVE, MDMM, and GM moves. The easy money vs difficult money, etc. If you see the market in a MDMM or GM move, that could be evidence of a trend in place. By definition a GM move is a big move with only very minor retracements, so that is also a trend in the technical analysis sense of higher highs and higher lows for an uptrending market. If I see an easy money move on the daily charts or weekly charts, then that could be a trend. If I see a choppy market and difficult money on the daily charts, where the market let’s say tries to make a new high but retraces a very large portion of the move, then that is a very poor trend as it is too choppy and difficult to trade with the trend. Sometimes you have to be careful, because there could be a bearish MDMM movement, inside a bigger GM move. And vice versa. So you have to watch out for that.
3. Then there is my favorite concept – that of the news/sentiment/fundamental/macro model and the scenarios. So my preferred definition of a trend is a market where the primary scenario macro forces are not yet exhausted, and there exists macro forces sitting on the sidelines that can push the market even further aggressively with market orders, and support the market on any retracement in an uptrend. And where there exists potential for scenarios to be chained together, so that when the primary scenario macro order flow is exhausted, a second or third new scenario can come into the picture to keep pushing the market and keep it trending and supporting it on any retracement in an uptrend.
4. Then there are the market sensitivity principles that help you determine a trend – sometimes before it starts and in its infancy stage. If you see a market shrugging off bad news and staying flat or moving higher, then the trend can be up. Or if the market previously was not moving higher on good data, but now you can see some FM spikes and intraday moves based on decent good data, then that can be evidence of a trend. Or if the market was moving higher on good data on an intraday basis, but giving up all those gains, if you see similar data causing a sustained ODVE move, etc, that can be evidence of a up trend as it shows changing market sensitivity. Or if the market previously was making ODVE movements based on good news, but now only makes a FM spike and reverses those gains, that can be evidence of a downtrend.
For example, the stock markets are in an uptrend. They are being supported aggressively on any dips, and the macro forces are strong enough to cause breakouts to the upsides and cause some clean volatility moves. The market is shrugging off weaker US econ data, and it isn’t selling off very much on it and in some cases using it as an excuse to go higher.
Or take the case of USD/JPY. It is in an uptrend. In the beginning and middle stages, it was primarily driven by JPY specific macro forces. But after May 3, 2013 or so the rally in USD/JPY became much more driven by the perceived strengthening of the US economy. So it was going higher and supported on dips based on fresh macro buyers from this new scenario that was going on.
Just knowing the trend is not usually enough. You need to know where the macro exhaustion point is going to be and if the trade is still worth taking from a win rate and reward risk ratio standpoint. You can’t always know this for every financial instrument on every single day. You just try your best, assemble the facts, interpret the information flow, battle of scenarios, do the work, etc and make your decisions.
If I missed a big trade for the week, and I only dedicated 30 minutes of work for that week, then I know I didn’t put in the proper work to find and catch that trade. I need to put in the effort. If I missed a big trade for the week and I put in 60 hours of work, then I know that I need to be more productive and smarter with the time I did spend working.
For example, I can guarantee you that at some point, USD/JPY is going to get massacred and drop 500 – 1000 pips in a single day. I don’t know when it is going to happen. It could happen in one week, in 3 months, in 8 months, in 2 years. I cannot possibly know, and neither does George Soros know months in the advance what the exact date will be. But it has happened in the past several times in the past whenever USD/JPY gets in a big uptrend. The best a person can do is to be aware of all the possible scenarios that can cause a move, to gather the information and the facts, try to get a feel for anticipating the future, ask themselves what they know that other people don’t and making the best decision they can.
You try to ask yourself, what scenario am I betting on? What do I see that other people don’t see? If the market is getting volatile to the upside (as an example), what makes me so sure that the trend is going to intensify to go even further to the upside so as to make the trade attractive from a reward risk ratio and current volatility versus near future volatility standpoint? Have I done the daily habits? What do they show?
I did not believe the big USD/JPY collapse was going to happen imminently last week, so I wasn’t crazy enough to fade the barriers at 103.00. But I am always looking out for potential clues as to when a trend is going to intensify and when it is going to reverse.
Try to learn and gather and sort out new information to prepare you for the future by refining your trading philosophy, figuring out yourself more, figuring out the missing principles and pieces of information you are looking for. Try to learn why you traded well or poorly in different market environments, etc. Try to learn what else you could of done to get better results.
I remember reading at one point that Steven Cohen asks himself:
What else can I do?
Sometimes the answer to the question What else can I do? Means that you need to add more work and exercises. Other times it just means you need to be more productive in the time that you already allocate to trading the market and figure out smarter activities, smarter thinking, less distractions, etc.
There are some people working 80 hours a week and making $50,000 per year. Other people working 40 hours a week and making $75,000 per year. Other people working 80 hours a week and making $200,000 per year. Other people working 80 hours a week and making $100 million per year. Everyone, rich or poor has the same 24 hours in each day. It just depends what you do with your time. What thoughts you think, what activities you do, etc. Of course, everyone is in a different situation in their life. Everyone has their own unique challenges that life presents them.